Deutsche Bank: Fed hike set for December

The minutes of the last Federal Reserve meeting were pretty convincing for Deutsche Bank, which decided to join the consensus expecting an interest rate hike in December.

"We are now in the December liftoff camp," economists at Deutsche Bank said in a note Wednesday after the release of the Federal Open Market Committee (FOMC) meeting minutes. "The October meeting statement hinted at the Fed's strong desire to raise rates at the December meeting."

The will-they-or-won't-they Fed tug-of-war has raged for much of this year, with markets often gyrating on fears over potential side-effects of the first U.S. interest rate hike in nine years. Emerging markets have been particularly hard hit by fund outflows as higher U.S. interest rates mean that investors can likely find higher, less-risky returns elsewhere.

Deutsche Bank's previous expectations the Fed would stay on hold in December may not have been shared by too many market players. The Bank of America Merrill Lynch fund manager survey for November found that 81 percent of those surveyed expect a December rate hike, up from 47 percent in October.

But for Deutsche Bank the clincher for its change of forecast was this nugget from the minutes: "Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions could well be met by the time of the next meeting."

Others have pointed to the minutes' references to "at the next meeting." To Fed watchers, the references are a clear signal the committee was ready to pull the trigger in December.

Deutsche Bank also noted the minutes' references to committee members' concerns they would lose credibility if they didn't pull the trigger.

"With financial markets now pricing a healthy probability of a December rate hike, we believe that the bar for liftoff is fairly low with respect to the incoming economic data leading up to the December 15-16 meeting," the bank said. "Even though we expect a soft November nonfarm payroll report, partially the result of payback from unexpected strength in October, the Fed appears likely to look through any potential November weakness, emphasizing the cumulative improvement over the course of the year."

To be sure, traders, noting some wavering in committee sentiment, took down the possibility of a December rate hike after the release of the minutes, from a 74 percent chance to 68 percent.

And for next year, Deutsche Bank is sticking with its expectations for two rate hikes in the first half, with the Fed staying on hold in the second half to monitor the cumulative effect of 75 basis points worth of hikes.